The Business Judgement Rule and Its Impact on Banking Malpractice
It is common for accountants, lawyers, and doctors to carry malpractice insurance against potential suits of negligence filed by clients. Though some of the same concerns of liability exist with corporate directors and officers, the litigation is handled much differently. There is a business judgment rule that shields them from some claims of routine misjudgments with business decisions, and in many states, this same approach can be used to protect directors and officers working in finance.
A Time of Change
For a number of reasons, the Federal Deposit Insurance Corp. is looking to change the rules on litigation against bank directors. In the state of Georgia, one judge issued a statement that bank directors should have high standards of accountability than other industry officers and directors, given the significant impact of financial decision-making. The FDIC has adopted this approach by trying to file suit against several bank directors in North Carolina, Illinois, and Georgia. A failed New York bank has also been the target of malpractice litigation.
A History of Rulings
The business judgment precedents were challenged in the 1990s when the FDIC was able to obtain federal trial rulings that removed the business rule protection from New York bank directors. Directors who find themselves coming under scrutiny for their actions may not always be afforded protections, and need a legal defense that uses credible finance expert witness testimony, documentation, and former legal cases to prove there was no misconduct.
There is also conflicting support for use of the business judgment approach with regard to the liabilities of community bank directors. Locally owned community banks are leading competitors against larger banks and their local-level counterparts for lending operations. Though local banks tend to understand the needs of their community more intimately and can execute honest judgment concerning their consumers, there is a deep fear that these directors could be sued if the bank fails on account of numerous loans in default.
The Real Story
According to the FDIC., bank directors are able to exercise business judgment with fear of legal liability, and yet, bank directors are fair game for lawsuits claiming simple negligence. Financial institutions need the experience and insight of conscientious officers and directors to be successful, particularly at the community level. With the FDIC seeming to talk out both sides of it mouth concerning liability, it becomes harder for small banks to attract the leadership help they need and implement solid programs of growth.